It’s A Question Of Ethics

Are a company’s ethical guidelines material (i.e., important to the investment decision of a reasonable investor)? In Cement & Concrete Workers District Council Pension Fund v. Hewlett Packard Co., 2013 WL 4082011 (N.D. Cal. Aug. 9, 2013), the plaintiffs alleged that the CEO’s undisclosed relationship with an independent consultant (which lead to his firing and a significant stock price drop) caused the company’s ethical guidelines to be misleading “because in light of [the CEO’s] endorsement of these tenets, there was an implication that [he] was in fact in compliance with them.” In addition, the company’s public filings contained a disclosure about the risk to HP’s operations associated with the need to retain key executives, which the plaintiffs claimed was rendered misleading by the omission of the CEO’s “actual, fraudulent, and noncompliant business practices.”

The court concluded that both sets of statements were immaterial. As to the ethical guidelines, the court found that they were “not specific, nor do they suggest that [the CEO] was in compliance with them at the time they were published.” Indeed, no reasonable investor would “depend on [them] as a guarantee that [HP] would never take a step that might adversely affect its reputation.” Similarly, the plaintiffs’ argument that the risk factor about executive retention was material improperly conflated “the materiality of statements concerning whether [the CEO] would, in fact, remain at HP with the materiality of vague and routine statements concerning the retention of executives in general.”

Holding: Motion to dismiss granted (without prejudice).

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